Guarantee Profit and Manage Cash Flow

If you don’t understand the financial side of your company, you will continually struggle to turn a profit and grow your construction business. Yet, understanding your financial statements is confusing, stressful, and – depending on who does your reporting – up for interpretation. 

How to Guarantee Profits AND Manage Cash Flow for Your Construction Business 

Have you experienced this frustration and lack of confidence that comes with muddled cash flow management? It creates a downward spiral. 

But, construction business owners should be as good at their business as they are at their craft. And, we believe it’s possible to get you there.

Below is the profoundly simple system for guaranteeing profits and managing your cash flow at the same time.

The 4-5-3 Framework

Profit First for Contractors uses a basic system called the 4-5-3 Framework:

4 Core Principles
5 Foundational Bank Accounts
3 Rules

When used together, this framework provides the confused, frustrated, stressed out business owner (that’s you) with clarity about cash flow management: what to charge, when to hire, how to save for taxes, what to pay yourself, and how to predict profitable future growth.

Let’s break it down.

The 4 Core Principles of Profit First for Contractors

1. Small Plates

Did you know if you want to lose weight, dieticians recommend using smaller plates? That’s right. You will consume less calories that way. 

The same goes for your construction business. 

When all your money is in one back account, it’s like one big plate. When you see it, you spend it. But when you divvy up your cash into multiple bank accounts, you’ll spend less because it looks like you have less. 

2. Serve Sequentially

The 5 “Small Plates” or foundational accounts are: Profit, Tax, Owners Compensation and Operating Expenses (OPEX for short). (Keep scrolling for a breakdown of the 5 Accounts.)

When you look at your revenue like this, you start making better decisions. That $10,000 or $100,000 check isn’t all your money. It has to serve the business in its proper place.

3. Remove Temptation

Back to healthy eating. If you want to create a healthy environment, you better trash all the chips and cookies. The temptation to sneak a bite is too big when that stuff is easily accessible.

The same goes for your profits and tax. You might think you’ll pay yourself back, or you’re making a one-time exception, but before you know it, cash flow is tight and you’ve gone into debt.

In this core principle, you lock away your profits and tax in another bank account, out of sight out of mind, so you aren’t tempted to steal from it.

4. Enforce a Rhythm 

Peaks and valleys happen in business. If you don’t have a system in place to manage your cash flow, you may end up making bad decisions – i.e. spending more money than you should when you have a spike in income, then hitting a valley and being desperate for cash. 

Profit First for Contractors gets you off the cash flow roller coaster with the 10/25 Rule. 

The 10/25 Rule says that you allocate 100% of your income every two weeks (on the 10th and 25th) to your bank accounts, pay your bills, and then get back to running your business.

This creates a rhythm. You’ll see how much money came in over the past two weeks and say to yourself, “Why is this more than the previous two weeks?” Then, you figure out why and replicate it.

When the opposite happens, you’ll ask: “Why is our revenue lower than it was two weeks ago?” Then, you’ll fix whatever is causing the issue.

The 10/25 Rule allows you to spot the trends in your business, predict cash flow, and pay your upcoming bills without needing to contact your CPA or run some complicated accounting report.

The 5 Foundational Accounts

The 5 Foundational Bank Accounts are: Income, Profit, Tax, Owner’s Compensation and Operating Expenses (OPEX). These are listed in order of their importance to your business, and each one serves your business in a specific way.

1. Income

This is just a pass-through account. Every two weeks (on the 10th and 25th) this account goes to zero because you will allocate all the revenue to the other bank accounts.

2. Profit

This is the reason you are in business. Without profit you have no business. Profit must come first.

3. Tax

When you make a profit you will pay taxes. Paying taxes, as painful as they may be, are a sign of a profitable business.

4. Owner’s Compensation

You, the owner, are the most important employee. Without you there is no business. I know you love your people, but you have been an unpaid employee in a profitless business long enough. You must pay yourself the market value of the work you do IN your business.

5. Operating Expenses

This account comes last even though it might be the largest account. From it you pay your bills. When the OPEX account is dangerously low, this is your business screaming at you to operate differently. Don’t steal from your more important accounts or your profits. That’s the reason you are in business.

The 3 Rules of Profit First for Contractors

Now that you have your foundation in place, it’s time to crunch the numbers.

1. Your Income is 100% of Your Budget 

If you spend more than 100% of the money that comes into your business, you are going to have problems. You will have to borrow money, steal from future jobs, or borrow from past profits. Don’t operate your business like this. 

2. Play the Percentages

For every dollar of income, some percentage of that dollar is spent on something. You must understand when and how these percentages are affected by the increase or decrease in income. Business is a game. Play the percentages

3. Start Small

You’ve heard the old saying, “Go big or go home.” Not here. The key to permanent profitability is small, consistent steps, over time. Start with a goal so small it’s impossible to fail.

The first step in implementing the Profit First for Contractors system is setting up a PROFIT account at your bank and moving 1% of your balance to that account.

Yep. It’s a small thing, but it’s a start.

Using the 4-5-3 Framework 

If you want to break The Craftsman Cycle® and make your construction business permanently profitable, then start using the 4-5-3 framework.

Get your PROFIT account set up at your bank.

Transfer 1% of your bank balance into your PROFIT account.

Don’t touch that money.

It will be there at the end of the month, then end of the quarter, and the end of the year.